Thursday, April 03, 2008

Fall from Grace -- Sweden (Imported Article)

Swedes seem to take delight in being the most perfect, most healthy, most odor free society on earth. Okay, I made up that last part, but the rest is certainly true:

Sweden is “the most successful society the world has ever known”, declares the left-wing British newspaper the Guardian; “Swedes lead Europe in reform”, claims the free-market-oriented Financial Times; only the Nordic model “combines both equity and efficiency”, explains a recent report initiated by the European Commission.

But just how healthy is the Swedish system? A new piece by Johan Norberg in The National Interest magazine suggests that the Swedish levitating act is in serious trouble because of hyperactive social engineers:

Sweden was rich: In 1970 it had the fourth-highest per-capita income in the world, according to OECD statistics. But at this stage the Social Democrats began to radicalize, with coffers filled by big business and heads filled with ideas from an international leftist trend. Social assistance was expanded and the labor market became heavily regulated. Public spending almost doubled between 1960 and 1980, rising from 31 percent to 60 percent of GDP.

The practical result has been a steep decline in the Swedish standard of living relative to other modern societies:

By 2000, Sweden had fallen to 14th in the OECD’s ranking of per-capita income. If Sweden were a state in the United States, it would now be the fifth poorest.

If Sweden were a state in the United States, it would now be the fifth poorest.Norberg notes that Sweden tried to make its economy more business friendly after a recession in the early ’90s left them with 12% unemployment. Even so it maintained the world’s hightest tax rates. When the recession ended and unemployment shrank to around 6%, the Swedish economy was still unable to provide any net job growth:

According to a recent study of 35 developed countries, only two had jobless growth: Sweden and Finland. Economic growth in Sweden in the last 25 years has had no correlation at all with labor-market participation…Amazingly, not a single net job has been created in the private sector in Sweden since 1950.

In reality, the situation may be even worse than that. Norberg explains that Sweden’s methods for calculating unemployment vary from some international norms. He also notes the extremely high rate of absenteeism, which is the hightest in the world:

Absenteeism is rampant in public and private sector jobs alike. The government provides sickness benefits equal to as much as 80 per cent of a worker’s wages. Although they are the healthiest people on the earth, Swedes now “report sick” more often than any other people. Absenteeism has doubled in the last seven years and “sick pay” now consumes 16 per cent of government’s expenditures.

The Swedish system is a “free lunch” economy. Not surprisingly, such a system creates its own unique (perverse) set of economic incentives:

The system of high taxes and generous welfare benefits worked for so long because the tradition of self-reliance was so strong. But mentalities have a tendency of changing when incentives change. The growth of taxes and benefits punished hard work and encouraged absenteeism. Immigrants and younger generations of Swedes have faced distorted incentives and have not developed the work ethic that was nurtured before the effects of the welfare state began to erode them. When others cheat the system and get away with it, suddenly you are considered a fool if you get up early every morning and work late.

Fortunately, the result of living in such a system are finally becoming clear to at least a few Swedes:

A former Social Democratic minister of industry recently explained what his party meetings in northern Sweden looked like: “A quarter of the participants were on sick-leave, a quarter was on disability benefits, a quarter was unemployed.”

Whether or not it can be changed remains to be seen. Norberg notes that it’s politically much harder to take away programs than to dole them out in the first place.

As Americans look to 2008 and the possibility of Hillary “socialized medicine” Clinton as the Democratic nominee for President, the lessons of the Swedish experiment should be noted carefully. The Swedish system of high taxes and high government benefits is not working there. It should not be replicated here in expectation of a better result.